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on Industrial Organization |
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Issue of 2007‒01‒28
two papers chosen by |
| By: | Albert Banal-Estañol (Department of Economics, City University, London); Paul Heidhues; Rainer Nitsche; Jo Seldeslacht |
| Abstract: | Merger activity is intense during economic booms and subdued during recessions. This paper provides a non-financial explanation for this observable pattern. We construct a model in which the target—by setting the takeover price—screens the acquirer on his (expected) ability to realize synergy gains when merging. In an economic boom, it is less profitable to sort out relatively “bad fit” acquirers, leading to a hike in merger activity. Although positive economic shocks produce expected gains at the time of merging, these mergers turn out to be less efficient in the long term—a finding that is broadly consistent with the existing empirical evidence. Furthermore, again because of the absence of boom-time screening, the more efficient acquirers earn higher merger profits during “merger waves” than outside of waves, which is also in line with empirical evidence. |
| Keywords: | Mergers, Merger Waves, Screening |
| JEL: | D21 D80 L11 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cty:dpaper:0607&r=ind |
| By: | Jaap H. Abbring (Vrije Universiteit Amsterdam); Jeffrey R. Campbell (Federal Reserve Bank of Chicago, and NBER) |
| Abstract: | This paper extends the static analysis of oligopoly structure into an infinite-horizon setting with sunk costs and demand uncertainty. The observation that exit rates decline with firm age motivates the assumption of last-in first-out dynamics: An entrant expects to produce no longer than any incumbent. This selects an essentially unique Markov-perfect equilibrium. With mild restrictions on the demand shocks, a sequence of thresholds describes firms' equilibrium entry and survival decisions. Bresnahan and Reiss's (1993)empirical analysis of oligopolists' entry and exit assumes that such thresholds govern the evolution of the number of competitors. Our analysis provides an infinite-horizon game-theoretic foundation for that structure. |
| Keywords: | Sunk costs; Demand uncertainty; Markov-Perfect equilibrium; LIFO |
| JEL: | L13 |
| Date: | 2006–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20060110&r=ind |